TUESDAY 7 MAY 2002

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Members present:

Mr Martin O'Neill, in the Chair
Richard Burden
Mr Philip Hammond
Dr Ashok Kumar
Mr Andrew Lansley
Mrs Jackie Lawrence
Linda Perham
Sir Robert Smith

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MR DOUGLAS ALEXANDER, a Member of the House, Minister of State for e-Commerce and Competitiveness, MR DEREK DAVIS, Director, Business Relations Group, and MR MARK HIGSON, Director, Postal Services, Department of Trade and Industry, examined.

Chairman

  1. Good morning, Mr Alexander. I am not sure if it is accidental that we are meeting in the Thatcher Room this morning to discuss the Government as shareholder of the Post Office, but I think we will leave that to others to draw conclusions on. What we would like to explore with you this morning is the relationship between the DTI and Consignia as the sole shareholder because some of us are not really very clear. We read in the FT and other papers about shareholder revolts, we read about shareholders of other companies expressing views as to the salaries which should be paid, a whole range of issues, and we get the impression that the Government in its new role is perhaps not as proactive as some shareholders in other organisations might be, but to what extent do you feel that you should intervene as the sole shareholder in the affairs of Consignia? Are there parameters that you have been set as the Government? Have you agreed on this far and no further, then we come in with heavy boots on or is it to be always the right hand or can we mix metaphors like that?
  2. (Mr Alexander) First of all, can I thank you for the opportunity to give evidence before the Committee and perhaps it would be appropriate if I introduced my two colleagues. I have Derek Davis, the Director of the Business Relations Group within the DTI, who has special responsibility for postal services, and also Mark Higson who is a Director of Postal Services in the Department of Trade and Industry. To try and answer your point, Mr Chairman, there was really a new regime put in place as a result of the Postal Services Act 2000 and there has been a degree of independence between the Post Office and the Government for 30 years, but there was a recognition at that point, not least in the light of views of not only management, but also trade unions and many others, that there should be a greater degree of commercial freedom given to the Post Office, that a more appropriate relationship would reflect a greater degree of commercial freedom. That was informed in part by frustrations within management as to the ability to explore what were seen as development opportunities in the liberalising marketplace within Europe and across the world and also, I think, a concern to ensure that management were given the opportunity to manage the business effectively in terms of the opportunities that were available to them. So really I think the new environment post the implementation of the Postal Services Act 2000 in which some of the old criticisms suggested that ministers were determined to micro-manage the business has now given way to some observations to the contrary and I think in fact what we are aiming for is an appropriate relationship which reflects the reality of commercial freedom whereby management are able to run the business effectively and, on the other hand, recognising that the Government retains a clear role as shareholder in terms of the Postal Services Act.

  3. Could I perhaps ask Mr Higson a question here. Mr Higson, you are the Director of Postal Services. How long have you been in this job?
  4. (Mr Higson) Nearly two years.

  5. So you had the same job with the same name before the single shareholder status and afterwards. Is that right?
  6. (Mr Higson) Yes.

  7. Has the job changed much in that time?
  8. (Mr Higson) I have basically come in to run the shareholder relationship, so although I have experience of other nationalised industries, I do not have experience of running the old regime of the Post Office.

  9. How long was there a single shareholder status enjoyed by the Government? When did that start?
  10. (Mr Higson) We formally came into place at the end of March last year, but the Government effectively operated an arm's length shareholder relationship, anticipating that for the period before.

  11. So you had been in under, as it were, the new regime de facto and de jure?
  12. (Mr Higson) That is correct, yes.

    Linda Perham

  13. Minister, it was confirmed in evidence by Consignia to the Public Accounts Committee that a significant proportion of Consignia's recent losses arose from its over-estimate of the growth in bulk and advertising mail volumes. Presumably, as sole shareholder, you approved their business plans. Did the Department have any misgivings about the projected growth in revenue or did it try to get Consignia to consider alternative methods with slower growth rates?
  14. (Mr Alexander) Yes, in essence, the business plan, as I recollect, anticipated growth in mail volumes of approximately 5 per cent and in fact mail volumes have grown by approximately 2 per cent which in part accounts for some of the difficulties that the company is facing at the moment. It is certainly the case that the Government approved the company's business plans over the last few years, although in fact that particular business plan pre-dated my arrival in the Department, but actually at the time that the Government approved that business plan, it muted serious concerns with some aspects of the plan and indeed questioned some of the assumptions on which the plan was actually based, although, as I say, that pre-dates my arrival in the Department.

  15. So if you had misgivings over it, what action could you or should you have taken?
  16. (Mr Alexander) Well, part of the challenge, consistent with the commercial freedom we have just been discussing, is to make clear to the management where there are concerns on the part of the owners, but actually to then make sure that management are judged by the capacity to deliver against the targets that they have set for themselves in the profitability of the business, and I think one of the changes that we see over time will be a clearer transparency and recognition that the targets which are set, management will be held accountable by the Government as to whether they succeed or whether they fail in terms of meeting those targets.

  17. I am just not clear about your status as sole shareholder, how much you can push them if you feel they are going wrong, whether you can make suggestions to say, "We have misgivings and we think that perhaps you can try something else", but at the end of the day what can you actually do if they say, "Well, yes, okay, Minister," or to the Head of Postal Services, "we accept that you have misgivings, but because of the way things are set up, we will actually still go ahead and you will judge us on our results"?
  18. (Mr Alexander) To return to the specific example, as I say, it pre-dates my arrival, but my understanding though is that concerns were raised in terms of the anticipated rate of growth of the market. Some of the evidence that was brought to bear by management at that time reflected the fact that previously they had been correct in their estimation of the growth of the volume of the market. There had been a measure, as I understand, being used in terms of a particular proportion of GDP and the fact that mail volume kept pace with that and they prayed that in evidence in discussions with the Department in saying, "We have managed to succeed previously in crippling the dissipating growth of volumes in the market". Obviously we expect management to recognise their responsibilities in terms of managing the business, but there is a significant transformation taking place across the business at the moment frankly, as you have heard in evidence before this Committee, relating to the fact that the quality of the management information that has been given to date has not been strong. Whilst, as John Roberts in his evidence made clear, the results and accounts have been sufficient to be audited, I think there is a separate issue in terms of the degree to which they could be used effectively in making those management decisions. In part, that is why we took steps last year around the same time as these discussions were taking place to actually strengthen the Board. One of the earliest appointments in doing that was Marisa Cassoni who was appointed as Finance Director and who is spending considerable force and a lot of time since her appointment trying to bottom-out the quality of the management information that is available and that has significantly broadened implications not just for the Government in terms of its position as shareholder, but it also affects the quality of the information that is made available to other stakeholders, for example, to Postcomm, but I think we are certainly alive to the issue of ensuring that the quality of information provided to us as shareholder is as robust as we can manage. It is a challenge for every business to seek to strengthen the management information that is available, so on that basis we have in place a process of work to try and strengthen the quality of information that is brought not just to our attention, but to others, in part reflecting the significant change that is taking place within the company from what was effectively a nationalised industry in which the quality of information within what really were discrete business units within the organisation was nothing like as strong as is required by the present position.

    Chairman

  19. Is that not a criticism of the DTI, that if it was run as a nationalised industry and not just a state corporation, and there is a difference, and I thought from 1969 or so it had been run as a state corporation, that in fact the people who were responsible for overseeing it within the Department of Trade and Industry and its predecessor departments were asking the wrong questions and that this comes at a time when there were other state enterprises, for example, British Nuclear Fuels, who have undergone similar metamorphosis, though not quite as dramatic. Surely within the DTI this begs questions about the joined-up nature of departmental government, let alone inter-departmental government when it comes to profit centres, effectiveness of return on investment and the like, and that really we have been getting short-changed by ministers and civil servants for a long time in this area?
  20. (Mr Alexander) I think the change towards the strategic planning arrangements that were put in place by the Postal Services Act was a recognition of the need for different and distinct management information on which we would be able to scrutinise the conduct not least of the Board in terms of achieving those profit targets, but I think there was a recognition that there needed to be a strengthening of management information. There is a whole stream of work being taken forward by the Finance Director and indeed Allan Leighton, as Chairman, to secure that information is available. I do think the information that was required, and I accept the point you make of course in terms of stakeholder information, but the information that was required was of a different nature from that which is now required, not least as is clear in terms of discussions that are taking place with Postcomm at the moment and, in that sense, there is a process of work on improving the quality of information available within the company at this stage, but frankly there is still a way to go.

  21. Really what I am trying to grope towards is that in the past the attitude was that by the comparatively transparent bookkeeping standards that the old Post Office applied in comparison with other state corporations, so long as it was making what was notionally a profit, nobody really bothered and so long as the Treasury got its haul, they were not fussy either. Is that rather a crude perhaps, but neat summation of it?
  22. (Mr Alexander) I think it is partially correct, certainly if you look at the broad numbers in terms of profitability, somewhere in the region of 20 million year on year in terms of Post Office Counters and if you look at the Royal Mail, which again was a historic figure, a profitable part of the business, and thirdly what had been the long-enduring difficulties for Parcel Force. There was a significant change that was required and I would really make two observations. First of all, I think in terms of previous governments there perhaps was not the attention to the quality of the management information systems which there might have been after the point at which the Heseltine proposals fell down. It seems to me that some of your observations are fair in the sense that the Post Office was continuing to take money and there were contributions being made to the Exchequer and, in that sense, I think there was a period of drift when apparently some of our foreign competitors were making significant advances both in terms of investment within the business, but also the quality of information that they could bring to bear in forming those decisions. I think in terms of the Labour Government post-1997 not least because there was a need quickly, as I think was reflected in this Committee's Report in 1998, and the challenge of introducing a greater degree of commercial freedom, there was a great deal of focus on the appropriate structure to the marketplace and what were the Government's arrangements that needed to be put in place. Certainly in terms of the initial review that was taken immediately on coming to power in 1997, that was reflected in the White Paper and a great deal of work taken through to the Postal Services Act 2000 and I think it would be fair to say that that was a major focus of the Department's work from1997 onwards.

    Dr Kumar

  23. Minister, how confident are you that Consignia are going to deliver a good financial structure which calculates the real costs of different businesses and addresses the problems of excess costs? Would you say you are confident it is going to deliver and, if it does not, what will you do about it in those circumstances?
  24. (Mr Alexander) Well, there is a process of change under way in the organisation at the moment. I think in terms of effecting significant change within the organisation, the appointment of Allan Leighton as Chairman marks a significant advance to the organisation, recognising the particular challenges it faces in a liberalising marketplace and in the face of growing competition. I think that one of the clearest challenges that we have set, the Secretary of State for Trade and Industry and myself, for Allan Leighton is to make sure, first of all, that there is a grouping of the issue of costs where clearly you saw a position where with a turnover of approximately 8 billion in a very significant and complex organisation, you have seen costs not controlled adequately, not least in part because, as the Chairman observed, top-line numbers for a period disguised the fact that the cost base was not being gripped seriously, and Allan is determined and resolute in his ambition to address that particular challenge, but at the same time making sure that he has available to him in terms of the decisions that are taken at Board level the quality of information necessary to make the best strategic choices. Another reason I would make in terms of in part why I think we have seen some of the difficulties that we have in recent years over Consignia is frankly that there was a strategy which was to some extent anticipated in the terms of the Report of this Committee in 1998 which said that the Post Office was in danger of being left behind by its international competitors. Now, there were, therefore, acquisitions which took place and a strategic objective would be effectively a complete distribution company which involved international acquisitions and I think we have made clear to Allan Leighton that his principal challenge is to make sure that actually the market in which Consignia is operating, the domestic market, we have a strong and robust company capable of course of discharging its universal service operations in terms of its licence, but also returning to profitability.

  25. So you are confident that it is going to do that?
  26. (Mr Alexander) As I say, I am confident that we are taking steps that will be necessary to strengthen not just the leadership of the company, but also the financial results of the company because there are a range of issues where work needs to be taken forward and frankly the company has experienced very considerable difficulties which I do not underestimate before the Committee.

    Chairman

  27. From what you seem to be saying, the priority is to get the books right and to show a profit. Would that be a simplification of it?
  28. (Mr Alexander) I think we would be keen to see the universal service obligation and service standards made as part of that description, but yes, I think focusing on the core business of Consignia would be probably the principal challenge that Allan Leighton is advancing at this stage.

  29. Is increasing the price of the stamp to inflate the revenue and, therefore, perhaps create profits an attractive way of doing that?
  30. (Mr Alexander) Clearly consistent with the changes I have described in terms of the Postal Services Act, the responsibility for determining whether stamp prices rise rests with Postcomm and it would be for Consignia, and obviously Allan will have a key role to play in that, in determining whether an application should be put in for the prices to rise. It is certainly the case that, by comparative standards, the price of our first and second-class stamps is more than in many of our European countries and the determination whether prices will actually rise or fall will first of all depend on whether or not an application is put in by Consignia and then by the determination of the regulator.

  31. So you, as the shareholder, the protector of the public interest, have no views on this subject?
  32. (Mr Alexander) Well, we have put in place a mechanism whereby if Consignia seeks a rise in the price of stamps, then a determination can be reached and in that sense it returns to the point that we were making previously in terms of the quality of information to be able to make a case which is convincing to the regulator and which will clearly affect the decision that the regulator reaches, but one element of the package that was put in place as a result of the Postal Services Act 2000 was that it would not rest with ministers to decide whether to raise or cut the price of stamps, but actually it would be a decision taken by the regulator.

  33. So you, as Minister, would be a spectator, you would have no power of veto, you would have no power to influence the matter whatever and you would not be consulted by the regulator before he took a decision?
  34. (Mr Alexander) Well, it is certainly the case that there is both at official level and ministerial level informal contact with the regulator and that recognises of course the influence of his role. I suppose the comparison I would draw would be the fact that I would regularly both informally and formally meet with David Edmonds, the Director General of Oftel, and in that sense, consistent with his responsibilities as an independent regulator, it is entirely appropriate that the Government maintains a dialogue with the regulator and so similarly of course there will be discussions and indeed I met Graham Corbett last week.

  35. But you do not have a power of veto? That is what you are saying?
  36. (Mr Alexander) The power actually rests with the regulator, consistent with the 2000 Act.

    Chairman: That is helpful for the record to get that right.

    Mr Hammond

  37. You said just a few moments ago in response to a question from the Chairman that one of your objectives was to ensure the maintenance of the universal service obligation and to maintain services. Those are two different things. As competition bites and the nature of Royal Mail business changes, would you be prepared to see Royal Mail's operations reduce to the level of the licence, that is to say, one collection a day from each postbox and one delivery without any commitment to the timing of that delivery?
  38. (Mr Alexander) I think in terms of the comments that I made in response to the Chairman's question when he asked what were our ambitions, I said it would be appropriate to mention the service standards. We have put in place a mechanism in terms of the Postal Services Act 2000 to ensure that consumers' voices are heard. Indeed one of the major innovations of the 2000 Act was the fact that (?) which, I think it would be fair to say, were felt not to be an overly powerful body in speaking up for the interests of the consumers, would see its role strengthened in the establishment of Postwatch and, therefore, it is the case that we have recognised the importance of service standards by ensuring that there is a body which can speak specifically for consumers' interests in these matters which is Postwatch and they have clearly views to give. Perhaps I am anticipating your questions, but I think it may underpin questions of a tailored delivery. Would that be correct, tailored delivery in terms of the whole of the second delivery?

  39. Well, perhaps the first question, to put it clearly, is: are you prepared to see Royal Mail's service reduced to the minimum level stipulated in Consignia's licence?
  40. (Mr Alexander) Well, I would argue that, consistent with the environment that is emerging, one of the principal strategic objectives of Consignia would be to ensure that the standards of service that it is able to offer its customers are superior to that of competitors. In that sense, I do not see your question as being isolated from the general issue of a set of standards. Of course, given the nature of Consignia's business, it will want to offer excellence in its service to customers and on that basis of course we would support that issue and we would like to see the quality of service that is offered improving and we believe that competition has a role to play in providing the kind of discipline for innovation, for cost, for a range of other factors which will actually allow it over time to offer that quality of service.

  41. Of course you would like to see better services offered and we understand that, but are you prepared to accept that as a result of the competitive pressures being placed on Consignia at least in some parts of the country, they may be required to reduce the level of their operations to the minimum stipulated in the licence? Is that something you are prepared for and something you anticipate?
  42. (Mr Alexander) Well, I would make a couple of observations. Firstly, we regard it as being important to get hold of the cost base of the company because clearly what could impair the standards of service over the longer term would be if it was thought sustainable to have a business of Consignia's to be losing 1.5 million a day, so we do recognise the importance of management showing initiative and taking the decisions necessary and putting the organisation on a firm financial footing. In terms of what would be the service standards offered to customers, then clearly in terms of the licence that has been granted to Consignia by Postcomm, those are standards which are set out there and clearly there could be circumstances in which that licence could be breached, but that then would be a matter clearly for Postcomm to say in terms of the available remedies. With particular products being offered to the marketplace or indeed the services which are being offered we recognise as being operational issues for management, so when, for example, they say, "We want to run pilots to establish whether it is possible to reduce, for example, the second post", or recognising that it is perhaps possible for small businesses within the locality, then we think it is entirely appropriate that those pilots are taken forward to investigate what actually is the evidence.

  43. Well, we are not talking about a breach of the licence, but we are talking about a reduction of services to the minimum required in the licence and you are prepared to accept that?
  44. (Mr Alexander) I think it is quite clear that we regard service values as being an important element and it is in fact established that the regulator actually sets the standards in terms of the licence and, as shareholder, we actually clearly want the company to be both profitable and successful and one of the key drivers of that profitability and success will ultimately be the standard of service to the customer.

  45. If the result of competition was to make the delivery of the universal service uneconomic for Consignia, what would the Government's reaction to that be? What would the Government do?
  46. (Mr Alexander) Well, the principal duty of Postcomm, as established under the 2000 Act, is the maintenance of the universal service and it will, therefore, be one of the key determinants of the judgment that is reached by Postcomm to ensure that the manner in which competition is introduced does not result in a position whereby the universal service cannot be delivered.

  47. And if that were to happen, the Government will step in?
  48. (Mr Alexander) Well, it is clearly a matter for Postcomm at this stage to reach its deliberations, cognisant of its responsibilities and consistent with what I said to the Chairman and, having met Graham Corbett last week, one of the points I was keen to emphasise at that meeting was that he be alive to the reality of his responsibilities, which are to improve the standards of service to the customers with competition, but also recognising the foundation of course of what is his principal duty which is to retain the level of service.

    Chairman

  49. Why did you say that? Let's face it, he goes to bed every night with that above his head, he wakes up every morning with that facing him, he goes to work and it is lying on his desk. Did you tell him because you thought he had forgotten?
  50. (Mr Alexander) No, I think it was entirely reasonable, given what I described as the role of the Government previously, in what was a broad-ranging discussion to be clear as to what I held to be a view that was an important one. We are in a position where clearly there is a great deal of -----

  51. But you did not just say it as an alternative to "good morning". Are you suggesting that the proposals that he was bringing forward were worrying you in the way that they were worrying other people?
  52. (Mr Alexander) No, I think it would be fair to say that where I had a degree of concern was the apparent disparity of the evidence that was being brought to bear in those discussions between Consignia in terms of the management information that was being provided and the evidential basis for what were the original proposals that were announced at the end of January. I was keen to impart to him that it was necessary to ensure that there was a constructive and important dialogue not least between Consignia and indeed others and the regulator itself during this period of consultation to ensure that what will be significant decisions that are reached by the regulator reflect a common view in terms of the effect of those proposals because if we were to see a position whereby decisions were being reached without the evidential basis, then that obviously would not be something that anybody would welcome. In that sense, given the degree to which not least in the public domain there have been suggestions on, for example, the effect and scale of opening as anticipated in the first tranche of liberalisation by the regulator those numbers being disputed by Consignia, I think it is entirely appropriate to suggest that there needs to be a constructive and important dialogue between the regulator and those people providing the figures.

  53. Did you say the same to Consignia because I recall that after the regulator produced his findings there was hysterical stuff - 45 pence for a letter to go from Islay to London? One does not always believe everything that The Mail on Sunday says and sometimes they are advised by other people, but the fingerprints of Consignia seem to be all over it. It did seem at one time that Consignia were running around like a headless chicken on this issue. Maybe it is different now that there is a head there in the shape of Allan Leighton, but are you even-handed in the way you deal with all of them?
  54. (Mr Alexander) I think you have made a fair observation. I assure the Committee that it is entirely coincidental with my appearance before the Committee today, but in the space of the last week I have met with Graham Corbett, with Allan Leighton and also with Gregor MacGregor of Postwatch, so I have covered all the bases in terms of discussions in the last few days. The sequence of meetings was first of all with Graham Corbett and, as I say, I was keen to impart to him the importance of making sure that there were constructive dialogues taken forward with Consignia. There was information, which he shared with me at that meeting, which he was still awaiting from Consignia, so I took the opportunity subsequently to Allan Leighton to make clear to him exactly the point that was made, that this involves both sides and it is very important that if there is further information which is within Consignia's gift, that is shared at the appropriate moment of making decisions which Postcomm is actually reaching. As I understand it, there has already been a formal submission given to the regulator by Consignia and there is a further presentation that Consignia anticipate making to the regulator itself, but I was keen, consistent with your view of being even-handed, to impart to the Chairman that it was important that in advance of that presentation to the commissioners, that where information is held which would usefully inform the deliberations of the commissioners, that be handed over with all speed.

  55. As a historian, you will be aware of the relationship between regulators and the regulated and the transmission of information has not always been that of full and frank exchanges.
  56. (Mr Alexander) No. I think that is a fair comment and again perhaps I could draw on my experience with the telecoms sector with my e-commerce hat on, which is to say that in some ways, from my limited experience of dealing with companies interacting with regulators, it would seem that one of the quickest ways to effect change is to see a change of leadership in terms of interaction with the regulator. I think in exactly the same way that on some of our discussions about broadband there had all too often been rather a sterile interchange between the company and the regulator and a great deal of effort put in place by some previous incumbents to try and stifle the regulator in their work, if you have the more forward-looking approach which recognises the reality that competition is coming and, therefore, to have a constructive engagement with the regulator is the way forward, I am glad to say I see that approach being reflected in the appointment of Allan Leighton.

    Sir Robert Smith

  57. When Mr Leighton spoke to us, he felt it would not be until the end of the year before they would have proper information to actually understand the business. Earlier you said that there was a need to improve information and that there is a long way to go. Do you think in a sense the regulator is operating in an information vacuum and it would be better if we were actually six months further on with the proper information available so that he could make a serious judgment of the issues?
  58. (Mr Alexander) I am of course aware of the evidence that Allan Leighton gave to you when he indicated that it would be about twelve months before he felt he could with confidence speak of the information in terms of its utility as a management tool. We certainly are keen, as always, to see that work carried on and I would pay due credit to Marisa Cassoni, as the new Finance Director, who has already undertaken a huge amount of work, but I think, for example, when you consider that this is an organisation that emerged with its establishment as a plc with 14 business units, I think there are reasonable questions to be asked of management in terms of their capacity to actually correct information, and when you speak to Allan Leighton in discussions with him, he says that actually there is a surfeit of information within this organisation and it is actually whether it is the right information or useful information that can actually allow the business to be managed effectively. To return to your substantive point about the regulator, I certainly think that is a matter on which the regulator will have to think long and hard in terms of the information available to him and I made clear in the discussions that I had with him that the evidential basis on which, for example, the Andersen model was being taken forward, clearly the quality of the information is of importance, but given his own position in terms of being clear as to the terms and responsibility, I am sure that is something he has given much thought to as the proposals are considered.

  59. In the light of that report, he seemed very reluctant to see any delay because of evidence. Do you think the public will understand that because surely we are on the one-way ratchet that six months' delay in starting the ratchet to make sure it is on the short-plan basis, but as he is going down the road and then finds the evidence does not stack up, people will be concerned?
  60. (Mr Alexander) As I understand it, the regulator's concern is to avoid a situation where there is a perverse incentive on the company which is, "If we don't sort out our management information systems, we can delay the advent of the proposals". In terms of what discussions I have had with the regulator, I have made clear that where there were significant disparities in terms of the information being provided by Consignia to the regulator, it was important that those discussions take place now so that he could speak with confidence to the final proposals which actually emerged and, in that sense, it is a clear challenge for those parties involved to ensure that there is a constructive dialogue in the way that there clearly has not always been in the past to make sure that those discussions can take place on the basis of certain evidence.

  61. In your answer to Mr Hammond though to the question he put to you about what the Government would do if the result of other competition was to make the universal service obligation uneconomic, you seemed to put all your faith in the fact that this was not going to be a problem that could ever come before you. Do you not feel though that the public would be more reassured if there was some kind of safety net there so that they did not feel that things were just being left to pure faith in that one way would work? When we met with the European Commission, they told us quite clearly that certainly it would be within the power of government to legislate to allow the regulator to levy other providers to ensure that the universal service obligation did not become uneconomic. What reason does the Government have for not allowing that?
  62. (Mr Alexander) I think, if I understand your question properly, there are really two issues. One is the terms of the Postal Services Act 2000 where there is not provision for the compensation scheme, although I understand that in terms of the European Directives of 1999, it would be possible for there to be a statutory instrument effecting a compensation scheme put in place. The view that was taken, I understand, by government at the time of the passage of the

    Postal Services Act 2000 was that power would not be necessary and whilst technically there is provision for a compensation scheme to be legislated for under the European Communities Act 1972, that is not something we are anticipating and it was not an issue that I was discussing with the regulator. I was making clear to the regulator that their responsibility was to ensure that they delivered an outcome which first of all, consistent with their primary duty, protected the universal service.

  63. But is there any reason you do not want this power to exist, if necessary?
  64. (Mr Alexander) Well, I would be very keen not least in the midst of a consultation undertaken by Postcomm not to suggest that somehow they could make decisions that they were not entirely confident about, sure in the knowledge that the Government would be prepared to step in with a compensatory levy on other parties or anything else. I would be much keener, and this was reflected in my conversation with the regulator, with Graham Corbett, to be clear to the regulator that we recognised that there are decisions to be reached by the regulator, but equally we are clear as to where the principal duty rests to uphold the universal service obligation as outlined in the Act, which is with Postcomm itself.

  65. Clearly for many of us with a rural constituency what is at the heart of this dispute between the regulator and the consumer on this information basis is the costs of providing the universal service obligation and the dispute really about whether rural deliveries are more expensive than urban ones. Is that something you would have a view on?
  66. (Mr Alexander) I am certainly sighted on the disparity which exists in terms of the NAO Report, Postcomm's own view and a far higher figure emerging from Consignia in terms of what would it cost, which is again why I sought to emphasise to the regulator that it was very important that there was a clear evidential basis for the decisions that are being reached. One of the difficulties, I think it is fair to say, and I think this was reflected in the evidence provided to the Committee by Marisa Cassoni, and please forgive me, this may be an impolitic point, but I cannot actually recollect whether it was to the PAC or to the Trade and Industry Select Committee, but she made clear that this is indeed a complex view actually to reach not least in terms of how you cut the costs, whether that is by geographies, whether you take a more traditional view which is that actually density of population, distance between delivery points and the weight of the mail is an appropriate metric to use, or alternatively you take the view of Postcomm, which I think is reflected in the view of the NAO which is actually that the principal cost accrues from handling. Now, in that sense, we have not commissioned independent work because we do not want to replicate and second-guess the work of the regulator while there is a process under way, but certainly we made clear that there were significant disparities between the view of Consignia and the published views of Postcomm at the end of January and that it was important that constructive discussions were taken forward on that view as well as others.

  67. Did you really think that before we go to the point of unleashing the competition, this has to be thrashed out to the point where there is a common understanding of the cost of rural services?
  68. (Mr Alexander) I have consistently urged the regulator in terms of the discussions that I have had to ensure that the commissioners are confident of the evidential basis on which they are offering proposals forward and, equally, consistent with what I just said to the Chairman, I have been clear to Consignia that given that the responsibility for upholding the universal service rests with Postcomm and they are reaching significant decisions, it is very important that there is a constructive and engaging dialogue between Consignia and Postcomm on this matter.

    Richard Burden

  69. You have mentioned, Minister, that you met the regulator last week. Do you meet the regulator frequently?
  70. (Mr Alexander) Officials meet with Postcomm, and I think it probably depends how one defines "frequently", but it was not the first meeting we have had and we have met during my time in office, yes.

  71. So how many meetings have you had with the regulator?
  72. (Mr Alexander) Perhaps I could send you a letter. I do not know the exact number.

  73. I would like to explore a bit in that case, if we could do that, about what the relationship is between yourselves at DTI, and the regulator. We have already touched on this and I would like just to pursue it a little bit more because you have a dual role here. On one hand, you are the single shareholder as far as Consignia is concerned and, on the other hand, you are the Government with an overriding duty to protect the public interest. Now, in establishing your discussions with the regulator, have you talked through with the regulator how far you should be involved in performing the second of those roles rather than the first of those roles?
  74. (Mr Alexander) Well, I would start by saying that the clarity of role, I think, was originally revealed in the White Paper in advance of the Postal Services Act in which we were keen to ensure an approach, which I think again was anticipated by your Committee in a previous recommendation in terms of lowering the weight to 50 grammes and you said it would be more appropriate for that actually to be taken by the regulator. We have been clear consistently that it is the responsibility of the regulator in this area of work. It was set in the White Paper, legislated for in the 2000 Act and consistent with what were the appeals not just on one side of the House, but indeed a recognition across the House of the importance of the independence of regulators, we did ensure that in reality as well as in spirit there was independence for this regulator. I am fully aware that there is a degree of concern, not least amongst the CWU members, as to possible actions by the regulator. If one looks at parliamentary briefing that was provided for the Postal Services Act 2000, what the CWU asked for is as independent a regulator as possible and that shows there was a near-universal view that a genuinely independent regulator was an entirely appropriate policy framework into which to place not just the Post Office, but what was an emerging market. The Government, therefore, has been clear with Postcomm in terms of the discussions that we have had, that they have to take account of all of the factors that are necessary for them in reaching their deliberations, and been clear with Consignia that it is important that they engage in those discussions. There may be circumstances in which, consistent with commercial freedom, Consignia hold views in terms of this proposal which cannot be taken. I remember Allan Leighton saying, whether or not it was to this Committee, that it was a matter for government, and I suppose that is partly why I am here today, rather than him in terms of what was the Government's view and I think you are right to recognise the fact that we wear a number of hats in this regard. We are certainly the shareholder of Consignia, we have set the public policy framework, but we have also recognised the independence of the regulator and, in that sense, we have been clear to the regulator that where discussions need to be taken forward for the maintenance of the universal service obligation, they need to make sure that they have the evidence available to them principally from Consignia, but obviously from other parties as well.

  75. I guess what I am getting at is what do you think the Government's role is beyond what the terms of reference of the regulator are? The regulator is independent and has got very clear terms of reference within which the maintenance of the universal service obligation is key, and you described it as a primary one, but the Government surely has got a greater role than that, otherwise the Government and the regulator would have exactly the same job. If I put an example to you, as far as the regulator is concerned, there has been a lot of concern expressed about the consequences in particular scenarios for rural post offices, there have also been worries about what the consequences of a certain course of action could be for smaller urban post offices. Now, a number of those consequences, desirable or undesirable, would not actually ultimately be the concern of the regulator because you could have maintained the universal service obligation, the regulator's terms of reference could be fully met, but, nevertheless, you could still see a number of the rural post offices close and a number of urban post offices close with major impacts to the local communities and the local economies and so on and quite legitimately the regulator could say, "Ultimately, that is not my concern". What is the Government's role in that and how far would the Government's concern for that in defending the public interest impact on or has it impacted on your discussions with the regulator?
  76. (Mr Alexander) Firstly, I would say you are absolutely right to suggest there are policy commitments that the Government has given in terms of the network and there was of course the PIU Report which set down a number of objectives in terms of the sustainability of the network. We have placed, for example, an obligation on Consignia to avoid preventable closures in the rural network, and that remains in place, but at the same time there are a number of steps being taken actually to ensure the long-term health and viability of a national network of sub-post offices. So we have certainly been clear where we recognise the responsibilities and 270 million worth of resource was committed in terms of advancing the PIU objectives and there are discussions that take place with the regulator which reflect that. For example, the regulator has recently furnished us with information in terms of rural network support, so there are a number of dialogues which take place with the regulator dealing with issues which stand aside from solely the issue of the proposals which were launched at the end of January, but we are clear as to what the principal responsibilities of the regulator are, which are to maintain the universal service obligation and thereafter to see what scope there is for improving standards of service to customers by the introduction of competition.

    Mrs Lawrence

  77. Can I ask you to put your shareholder hat back on again for a minute because there does seem, I think, at the moment at least to be a certain amount of contradiction. You mentioned meetings you have had with the regulator, with people from Postwatch recently, but we were rather surprised that Consignia had not consulted you as a result of making its response to Postcomm's proposals. Now, we recognise the independence of the regulator and the role that you have gone into, but were you not concerned about the lack of consultation before Consignia's submission was made, bearing in mind the shareholder role?
  78. (Mr Alexander) I think I would draw on the point which was made previously by the Chairman, that there is a position whereby historically certain companies in their relationship with the regulator obviously sought to reflect their commercial advantage in terms of those discussions and, in that sense, we were keen to ensure that the commercial freedom, which was discussed on the floor of the House and indeed is related in the White Paper and in the terms of the Bill, was a reality which was we were keen to give Consignia the opportunity to make sure that what, by collective agreement at the Board, they put forward as what they thought were in their best interests, we would not see as being a direct read-across to that reflecting the view of the Government more generally, but obviously where we are actually engaged with the company is in terms of the broad targets that are set for the company. There has historically been the position with the setting of the strategic plan. We are at the point at the moment in that dialogue whereby, for example, there are a couple of non-executive directors who are about to be appointed to the company and that process is about to be taken forward and we would judge the performance of the management at Board level against the achievement of those targets that are set out, and, in that sense, we anticipate, for example, at the moment the arrival from Consignia in the not too distant future of their next strategic plan and that will give us the next basis on which the performance of the management will be judged by us with our shareholder hat on.

  79. Can you not see the fact that to many, to us on this Committee, it appears that you just did not want to be involved publicly in the argument? The dispute has been carried out very publicly in the media between Postcomm and Consignia and the impression you have given is one of standing back and not wanting to get involved in the in the argument.
  80. (Mr Alexander) Clearly that is a view and there has been a number of people who have criticised or attacked the Government, and there always will be. We were very clearly of the view that we had put in place a mechanism which did not have as an incidental add-on the maintenance of universal service obligation. As I say, the primary duty of the regulator was to uphold the universal service and the second duty of the regulator was to look at these issues of competition. We have put in place our public policy and regulatory framework to achieve that goal and it would not have been appropriate, therefore, given the roles that we do play which are not only as shareholder of Consignia, but also having established that regulatory framework and indeed having managed the appointments of Postcomm's commissioners themselves, for us to be entering the public domain and second-guessing a range of decisions before those decisions had actually been taken by the regulator. It would be fair to say, as I have sought to to the Committee today, we have urged the regulator and indeed the company to engage in a dialogue because we do recognise the importance of the decisions that the regulator has to reach and we are keen to ensure that if there was a role of perhaps knocking heads together, we could fulfil that role.

  81. Can I come back again on a point made by my colleague here because when we interviewed Graham Corbett, the one thing I think again that, although you have responded to my colleague's question, we were left up in the air about was that you have just reiterated that the regulator is responsible for the maintenance of the universal service and competition, but Consignia's range of services is a huge range of services which in many ways, as well as the Government being shareholder, depend on the delivery and other essential services, particularly in rural areas. Now, we asked the regulator himself about this potential impact on Consignia as a business and he just said flatly, "Well, our concern has always been the universal service and competition", in other words, "Wipe the rest away because, as far as I am concerned, as regulator, it has nothing to do with me". Now, I think for all of us that left a huge question mark in our minds.
  82. (Mr Alexander) I hope I can offer some comfort to the Committee because I certainly did emphasise to the regulator that both in practice as well as in theory the maintenance of the universal service obligation is the principal responsibility and, in that sense, you do need to have a position whereby the licence holder charged with responsibility for delivering the universal service obligation has to be in a position to do so. In that sense, it would be perfectly appropriate for Postcomm, in their deliberations, to have consideration for the financial health of Consignia in the short term as well as in the medium and long term in terms of discharging their principal and secondary obligations.

    285. We have been talking so far about the relationship with Postcomm in respect of their recommendations for liberalisation but, of course, there is another set of proposals of which the Government has some ownership, namely the ones that were negotiated at the Council of Ministers. It has been suggested that perhaps it would be desirable to go along with the original suggestion, life would be a lot simpler, and not bother about Postcomm's suggestions. What is the legal position here? Maybe we could start from there.

    (Mr Alexander) I was the person in the chair at the Telecoms Council in October. Agreement was reached at the Council of Ministers whereby there would be the step change to liberalisation in 2003, in 2006 and potentially in 2009 a fully liberalised market, and that was a position that we supported, indeed I supported at the Council in October. The means by which in a United Kingdom context that will be implemented will be a matter which will be determined once the position is formally adopted, which will be in the months to come as it is still winding its way through the process. In that sense it is entirely appropriate that Postcomm should be aware of what our international obligations are on the basis of the decision that was reached in October. All of that information has been in the public domain at every step in the process since then until the anticipated proposals in January.

  83. What do you mean by international obligations? My understanding is that these are suggestions, they could be set aside, and they could be set aside in favour of the regulator's recommendations.
  84. (Mr Alexander) First of all, I think it is important to be clear about what was decided in October. There is one view, which has been ventilated in the press and elsewhere, suggesting that there is an agreement across Europe as to the way forward on liberalising postal markets and that every other country will adopt exactly that approach and that somehow the United Kingdom has taken a unique and distinctive position in saying a different position will be taken in the United Kingdom. First of all, it is important to emphasise that there is not a uniform view as to the way forward within Europe. For example, Sweden and Finland are liberalised, and then there is a degree to which Germany and the Netherlands are below the price/weight ratios specified in terms of the decision that was reached at the Telecoms Council in October. It is therefore perfectly appropriate for the UK to reach a view as to what best advances the public interest in the United Kingdom and in that case, as I say, we have set down the responsibilities for the regulator which are the basis for the proposals which were announced at the end January while at the same time meeting our obligations in terms of the 2003, 2006 and 2009 timetables.

  85. Mr Corbett might not accept this but there is a political problem here in the sense that people are saying we do not like what Postcomm is offering but some of them, take the unions for example whose members are going to have to implement this, now seem to have come round to the view that not only are they in favour of an independent regulator - and I would not wish to put words in their mouths but I will do so anyway - they are in favour of the European Council recommendations and here, with one bound, you can be out of gaol in the sense that you could have the unions on board accepting the principle of a liberalised timetable as long as the Corbett ones are not implemented.
  86. (Mr Alexander) I have to inform the Committee that the CWU views are at least consistent in the sense that they are consistent with my negotiating position at the Telecoms Council. I made contact with Consignia and indeed with the CWU in advance of that meeting and explained to them what would be the position and terms of the step change of liberalisation. It would be fair to say that the CWU had concerns in terms of the maintenance of the universal service as reflected in our negotiating position in terms of the ultimate Directive that emerged so in that sense it would be somewhere unfair to suggest that this was merely a tactical manoeuvre on the part of CWU in light of the proposals that were announced in January. On the substantive point of will this step mean get out of gaol, again that fails to capture where the responsibility lies given the public policy framework and the regulatory framework established by the 2000 Act. We were clear that it rested with Postcomm to be able to ensure that the duties that were set down by that Act had actually been discharged.

  87. But the real politick of the situation is that the average punter is someone who does not have a Peter Hennessey view of the British machinery of government and tends to have a rather more simplistic view of it. I am not suggesting that the unions are in that position. Can I ask one last point on this. Would it be possible, if we were to take the other tack, what my colleague Mr Hoyle, who sadly is not with us, rather inelegantly (uncharacteristically for him) in referring to the combination of Corbett plus the European Council called the "double whammy". Would the alternative then be for the Government to seek a derogation on the European dimension and allow the home-grown version of the Corbett proposals to go ahead? Is that a possibility?
  88. (Mr Alexander) The favoured approach would be to ensure, consistent with avoiding a derogation by the United Kingdom of proposals that have been widely accepted across Europe, that due consideration be given by the regulator to what will be the changes that come as a result of the Directive being adopted.

  89. I do not really understand you. Are you saying to me that you could not go to Europe and say, "We have got a better idea than the one we agreed. We are not asking you to take it up but we would like you to allow us to give it up because we have got a better one"?
  90. (Mr Alexander) In terms of the politics of this I would not fully follow that logic in the sense that more criticism is directed by the unions and others -

  91. I am sorry, I am not talking about the political acceptability, I am talking about plan B completely. This is you going off on a different tack. The people you have to deal with are not the CWU, Postwatch or the Mothers' Union or anything else like that. We are talking about just the group going to the Council of Ministers and saying, "Look chaps, mes frères, we now have a different view and we think that it would be acceptable to push forward with the Corbett proposals but we do not think it would be acceptable to push forward with the Corbett plus." Would such an approach be possible under European law?
  92. (Mr Alexander) My understanding is that the European proposals cannot be set aside once the Directive is adopted. More substantially, the nature of the decision that was taken at that Council did not preclude the possibility of Postcomm or anyone else from coming forward with proposals. It basically set a minimum standard of liberalisation that needed to take place between 2000 and 2006 and ultimately full liberalisation in 2009.

  93. In reality these are totally different approaches which are being considered. One is related to weight and the other is related to price.
  94. (Mr Alexander) It also reflects the reality that there is great divergence across Europe at the moment. For example, if you look to Spain in terms of the Presidency of the European Union, they have a situation at the moment whereby there is no reservation on price, weight or any other basis in terms of the city although there is in terms of mail between cities and in that sense it is important to recognise that part of the thinking that informed the Council decision in October of last year was there was diversity across Europe, and that while this would set a minimum standard there is significant scope for countries to adopt a different approach. I hesitate to widen the conversation but I would imagine there are many circumstances in which a different and more pro-competitive environment has been established in the United Kingdom than that which would have been adopted purely on the basis of European legislation to the advantage of the United Kingdom. That is a consideration that I am sure will weigh on the mind of Postcomm in the weeks to come.

    Mr Lansley

  95. My apologies for being late, I have been on the Enterprise Bill. Just on this point you mentioned that before the October Council discussions with Consignia and CWU that although Postcomm published their proposals in January they commenced consultations at an earlier point in July. When you went to the October Council in order to agree the Directive, did you go on the basis that Postcomm were happy that whatever was agreed in October could be consistent with various models that they were considering in the introduction of competition in this country?
  96. (Mr Alexander) Speaking from memory, my recollection was that given the statutory basis of the powers for Postcomm it would not prejudice the ability of Postcomm to make determinations given what was anticipated was likely to emerge from the European Council. Given historically we have got a situation where there is a price, weight and reserved area approach taken across the European level, it was anticipated it would be within that area that consensus would likely emerge at the European Council. Given that a different approach has been taken at the United Kingdom level in terms of the granting of individual licences, then I do not recollect there being a grave concern as to the degree to which it would prejudice Postcomm's ability to make decisions later on during the year.

  97. A difference but not necessarily inconsistent with what Postcomm were saying? It was something you already knew in October and you agree it is not necessarily inconsistent with what Postcomm would say?
  98. (Mr Alexander) That would be true partly because of the initial consultation that was issued by Postcomm in July and also a desire on our part to ensure that there was a degree of liberalisation across Europe consistent with the third report of this Committee in 1998 and some of the thinking that had been taken forward since then that if there was going to be a degree of liberalisation across Europe then potentially that could lead to more economic opportunities in the future.

  99. When Consignia were with us on 16 April we asked them questions about the reported relationship with the Dutch post office and effectively John Roberts said, "We did have discussions but they did not take us very far." At this point it would be useful for you to tell us as the shareholder when these discussions first took place. Was the DTI immediately informed?
  100. (Mr Alexander) If I can take you back to the beginning, in June 2001 Consignia approached the Department of Trade and Industry and intimated that they were keen to hold discussions with TPG, the Dutch post office. This in part reflected the fact that there had been joint working between Consignia and the Dutch post office previously in partnership with Singapore Mail in terms of an international joint venture. On the basis of the discussion that had taken place between them they were keen to explore those possibilities. As Minister I authorised those discussions to be taken forward formally in July of last year. I am just checking my notes here. It was on 25 July that we gave authority to Consignia as shareholder to take forward the discussions that they had requested. Those discussions carried on. It emerged in March of this year that common ground could not be found between the potential parties and on that basis it was agreed by Allan Leighton, then acting as interim chairman, that the discussions cease.

  101. What was the nature of discussions that you authorised? Were they discussions for exchange of equity or for an equity stake in Consignia on the part of TPG or a takeover?
  102. (Mr Alexander) Exploratory talks with TPG about a merger of their postal services which would have involved both Royal Mail and Parcelforce.

  103. In the United Kingdom and in the Netherlands or the United Kingdom only?
  104. (Mr Alexander) It was anticipated there was scope for the merger of both. It would have involved Consignia on the one hand and TPG on the other establishing a joint venture involving both postal services. So by definition it would be both. I am hesitant in my degree of candidness because of the confidentiality agreement signed (entirely appropriately) between Consignia and TPG, which is a quoted company on the Dutch Stock Exchange, and I am seeking to recognise those responsibilities. I am sure you appreciate that and you would not want me to put Consignia in breach of the undertakings given to take those discussions forward.

  105. I will ask one more question in relation to DTI Ministers' participation in this because although Ministers authorised discussions in July which concluded in March, were they discussions with which Ministers or officials on your behalf were continuously involved as shareholder?
  106. (Mr Alexander) There were discussions, first of all, between ourselves and Consignia when they made that request when we were keen to establish the basis for it. Perhaps it would be helpful if I explain. We were clearly of a view that Consignia needed to try and find common ground with the Dutch in terms of what was in their interests as an organisation, and that common ground was not established. As Ministers we felt it entirely appropriate that there be a test. We were under an obligation to exercise a different test which was that, even if grounds had been found between Consignia and the Dutch company, it served the public interest. That would involve considerations of whether it achieved those standards of service, and considerations of the financial sustainability and the strength of the organisation, the effect on employees - a range of different factors. We were never ultimately called upon to make that determination because there was no common ground established between the two companies involved. In terms of direct contact by Ministers, the negotiations were taken forward by Consignia management. They approached us in the first instance and said they wanted to take them forward. There was a single discussion between the Secretary of State and the management of TPG at which she made clear that the Government acceded and affirmed the right of the Consignia management to continue those discussions but it was very clear from the outset that this was an initiative that we felt was consistent with commercial freedom that had been granted to the organisation that they take forward. When the negotiations reached a point at which the Dutch sought clarification that we were willing to allow the management to take forward these discussions, that conversation took place.

  107. Who do you believe took the view that these discussions could not fly off the ground? Was that Consignia management or TPG or Ministers?
  108. (Mr Alexander) I think, as in all of these discussions, if you were to speak to TPG or Consignia management you would probably get a different story of what were very complex negotiations. Ultimately, we agreed with the view of Allan Leighton, the interim Chairman of Consignia, that these discussions should not be advanced and on that basis we were never called upon to exercise what would have been our separate, but nonetheless very important, determination that even if commercial grounds could have been established between the parties it served the public interest for the merger to be taken forward.

    Mr Hammond

  109. Two very quick questions on this. First of all, can you confirm that the decision to authorise Consignia to enter these discussions was taken by Ministers in the plural and therefore would have been known at the time to all DTI Ministers?
  110. (Mr Alexander) No, there were only a very limited number of Ministers who were aware of these discussions, consistent again with the requirement for confidentiality. I am sure the Committee would appreciate that given the sensitivity of discussions with a publicly-quoted company there was a very limited number of Ministers who knew about it. If it would be of assistance to the Committee I could furnish you with the detail of which Ministers were sighted.

  111. That would be very helpful. If I could take that one step further. In the exercise of its role as the shareholder that is not something which DTI Ministers do collectively? The Secretary of State presumably would always be involved in the exercise of the power of the shareholder?
  112. (Mr Alexander) I would not want to talk in the generality but I can tell you in the specific I worked extremely closely with the Secretary of State during these discussions. Indeed, it is one of the areas where both of us were appointed to our respective positions in June of last year and there was a meeting held. There was an approach made to us, as I say, by Consignia at that stage that they wanted exploratory talks to be taken forward. To be honest, I cannot remember but it was probably the Secretary of State who signed the letter in July indicating that we would accede to these exploratory talks being taken forward in formal discussion. In terms of who has been working on the detail of this, clearly it was myself in terms of my responsibility for postal services and also the Secretary of State was given report of these matters under discussion.

  113. Have you authorised or have Ministers authorised the management of Consignia to enter into any other discussions of a similar nature with any other party?
  114. (Mr Alexander) No. I would also say that Allan Leighton discussed this and we reached agreement that talks should not be taken forward in March of this year. In terms of his appointment as Chairman we have made clear to him that there is a very significant responsibility for him in terms of sorting out some of the challenges that were described previously so in that sense the focus of his work and the focus of Consignia is dealing with all the issues we have been discussing previously.

    Chairman

  115. Can I go back to a couple of points. You said to us that what was the subject of discussion was the Royal Mail and Parcelforce elements of Consignia. Roughly how much are these bits of business worth? I should know but I do not.
  116. (Mr Alexander) To be honest, in terms of valuation in these negotiations, as I am sure you will appreciate, there is a degree of sensitivity.

  117. Let me put it in a slightly different way then. In the terms of reference of the letter which you or the Secretary of State signed - and I am obviously paraphrasing because I have never seen it, and I am trying to grope my way towards it - was it seen that a merger was the desired outcome or was it seen that a takeover would be a possibility? Perhaps not the prefered option but an acceptable one?
  118. (Mr Alexander) As I recollect - and, forgive me, I do not have the letter in front of me - the discussions involved a merger, as I say, both of the Parcelforce element of business but also of Royal Mail. It would have been a very significant undertaking.

  119. If we are talking in terms of a merger, and not talking in terms of sums of money but talking in terms of proportions, am I right in saying that the parameters for a merger are that one side should constitute no more than 60 per cent and the other no less than 40 per cent of the new body that would be established. Is that correct?
  120. (Mr Alexander) Tempting though it is to be drawn into discussions ---

  121. It is a question of fact.
  122. (Mr Alexander) Forgive me, if I can try and explain. I would be very hesitant to discuss before the Committee any of the particular details around valuation given the sensitivities of the issue. In terms of the position of around 40 and around 60, my understanding (although, as I say, it is an understanding and perhaps if it would be helpful I will write to you) is that broadly those figures are taken within the City as being a reflection of a merger rather than a takeover.

  123. We were a wee bit disappointed because the impression we got from Mr Roberts from Consignia was that there were a couple of chats. We got the impression that someone jumped on a plane and went over to Amsterdam, had a blether, came back and said, "I do not think it is a very good idea." The fact it took eight months to get to that position is another matter. At the time, to be honest, we were not very well briefed and we are not very well briefed at the moment because you are not telling us very much! If I can get back to the point, however, if you have a thrusting, effective Dutch-led international postal service and you are a rather beleaguered and in some areas under-invested British postal service cum Parcelforce which is renowned only for its poor service and bad profits or non-existent profits, if you are going to have a merger there it might be rather difficult to achieve and so, figures notwithstanding, would a takeover by the Dutch have been a politically acceptable outcome to the discussions we were talking about?
  124. (Mr Alexander) First of all, we did not reach a view in terms of the public interest because the discussions did not reach that far. In terms of the original remit it was in terms of a joint venture and certainly not in terms of a takeover. That would be the starting point. Perhaps it might be helpful - and I am appreciative of your sensitivity to some of the disclosure issues - if I explained some of the thinking behind our acceding to those discussion being taken forward at all, given the rather uncharitable description of the strategic rationale for it that you have just offered. There had been a view (and this was expressed by this Committee in 1998) that we were missing significant opportunities in the post office internationally and that we needed to seek to catch up with some of our potential major international competitors in a liberalised market-place. The Dutch post office, as you indicated, is a highly successful business. It has a tremendous record not just in terms of recent productivity but in terms of industrial relations. It is a well-run and well- managed operation. There was a view, and it was at least worthy of consideration, that we give thought to exploring discussions with Consignia to inform those discussions whether there was scope for a joint venture leapfrogging the competition in terms of giving us some of the advantages that being part of a complete distribution company internationally could have offered. If you look at the high value markets that the Dutch are in, their excellence in terms of logistics, there would have been some issues that were at least worthy of consideration, given some of the problems you have described with Consignia. You were right to identify value for money as being an important consideration in all of these factors. That was clearly an issue for Consignia itself in terms of the commercial discussions that were being had and which were weighing heavily in terms of any deliberation which we ultimately made, which as it transpired we were not obliged to make because the deal did not come to fruition.

  125. Businesses can change because of a variety of things. Two options would be a merger or an acquisition. The acquisitory power of Consignia by the Act is somewhere of the order of 75 million, is it not? That is as far as the boat can be pushed out without other things being brought in. Obviously you could not acquire the Dutch postal service, therefore it had to be a merger, and what I am not very clear about is whether the rock on which these discussions foundered was that you did not get on with them at the end of the day or alternatively that, in fact, Britain and its Royal Mail and Parcelforce was going into this as the junior partner in what would ultimately be seen not as a merger but as a takeover such was the beleaguered and debilitated state of Consignia's Parcelforce and letter delivery service.
  126. (Mr Alexander) My starting point would be to emphasise the fact the discussions being taken forward from last summer to March were on the basis of a joint venture and not on the basis of a takeover.

  127. If the joint venture could not be a joint venture because of the difficulties in valuation then it would have been a takeover and that would not have been politically acceptable.
  128. (Mr Alexander) I would make the point to remind the Committee that Ministers were not in the room during these discussions.

  129. I am sure you had a glass to the wall. You would not have been doing your job if you did not.
  130. (Mr Alexander) It is fair to say we were involved in those discussions and there was a range of issues on which this deal foundered which included regulatory issues and which included industrial relations. There are a range of different factors which in terms of assessing ---

  131. You are not going to tell me that the Dutch have worse industrial relations than Consignia?
  132. (Mr Alexander) I do not think they have had a strike in ten years.

  133. Exactly, so we can set that one aside. The one-day general strike might have been an option but apart from that what are the other ones?
  134. (Mr Alexander) There were a range of issues including industrial relations, and discussion on valuation of course formed a central part of the negotiations that took place, but I would not be in a position to put numbers against that. I am sure you appreciate that because of what were highly confidential discussions being taken forward between two potential parties.

  135. We will finish on this point. If it were not possible for it to have been a merger, and it certainly was not possible for Consignia to acquire the Dutch post office, then am I right in saying that it was a political non-starter?
  136. (Mr Alexander) You are inviting me to answer a hypothetical question. If you were to tell me that the Dutch post office will appear tomorrow and say, "We want to take over the Royal Mail" or whatever part of the Consignia business, that really is a separate question from what happened last March which was on the first hand that there could not be agreement reached between the parties on a range of different issues, which I regret are covered in terms of the confidentiality agreement that was reached to start these discussions but, secondly, we would clearly have retained rights as Ministers to deliberate upon any potential deal as to whether it advanced the public interest. Factors we would have weighed in the balance would have included the ability to deliver benefits for the company itself, its customers, its workforce and taxpayers. There would have been a range of factors but we were never called upon to exercise that judgment.

  137. I am just trying to think of what the paragraph would be in the report that we would produce on this matter. I am inclined, and my colleagues might just nod in agreement or not, to say that: "The Committee was not convinced that the discussions with the Dutch post office and final agreement foundered on anything other than a difficulty over valuation and the likelihood that it would be very difficult for a British Labour Government to sell such a deal to the country."
  138. (Mr Alexander) Of course, it is the right of the Committee to draft the report as it sees fit. I am merely reflecting the fact that issues that were very live and had not reached agreement between the parties included, for example, industrial relations and the degree of risk inherent in that and issues in terms of the regulatory framework which were potentially present. Were the Committee to see fit to draft such a paragraph, what you are convinced by or not is your domain, but I would certainly hope it would be reflected that the Minister indicated that there was a range of factors not agreed between the parties. The other point it would perhaps be helpful for me to make is it is appropriate and consistent with commercial freedom that management be given the scope to have these discussions. Equally, on reflection, when one considers some of the acquisitions that have been made historically, there are questions which could be asked of management in terms of the wisdom of those individual commercial judgments. There clearly has been a process of learning under way in terms of the operation of commercial freedom but the approach we adopted here was reflective of the right balance, which is, on the one hand, to allow talks to take place, and if there was a compelling strategic rationale for this deal to be done according to the management then it was right that we give them the scope to explore it. On the other hand, it was equally right that as Ministers we retained the right to exercise our ultimate judgement in the public interest were such an agreement to be reached (which in this case was not the case).

    Sir Robert Smith

  139. To avoid management going round in circles, would it not help them to know in principle whether you had any objections to them selling equity in the company?
  140. (Mr Alexander) The acceptance that they could take part in exploratory discussions had been on the basis of their approach to us in the summer of last year when a joint venture was mooted. There had been form with this in the sense there will be a joint venture on a much, much smaller scale in terms of the international mail with both TPG and Singapore Post. In that sense to what we gave our assent was discussions focusing on the potential for a joint venture.

  141. Currently you draw the line at selling the company or part of the company?
  142. (Mr Alexander) Two issues. First of all, it is a question of what should be the focus of management at the moment and, frankly, I do not think it should be either on acquisitions or individual strategic partnerships but I think it is appropriate for us to say that the commercial freedom that they have been granted leaves it open to them to come forward in the future with proposals that we think make sense. We will equally make a determination in terms of public interest at any point in the future when such proposals are brought to us. It would be fair to say the focus of management, in agreement with us, should be on getting the company on a stronger foundation. In that sense there is a stream of work which was being taken forward from last summer with our agreement in terms of strengthening management information, strengthening the board and trying to make sure a decision that needs to be taken could be taken. At the same time there was clearly a management focus on one strategic answer to some of the challenges that this company faced. We were willing to accede to those discussions being taken forward because they convinced us it was at least worthy of the consideration to answer some of the problems historically identified not least by this Committee in terms of the work of Postcomm. At the same time we were developing work being taken forward in the autumn of last year in terms of putting the company on a stronger foundation. In that sense when it became clear in March of that year that there was no common ground between the two organisations, we were in a position very quickly, with the appointment of Allan Leighton as Chairman of the organisation, to take forward other steps that needed to be taken. Those were painfully difficult decisions in terms of the first stage of renewal of the company that followed on very quickly from the basis of work that was being taken forward, particularly in that case Parcelforce. There is now a stream of work being taken forward in terms of strengthening the organisation.

    Mr Lansley

  143. You will be aware that the interests of management and the interests of shareholders can differ. Although you said you were not present and Ministers were not present at these discussions that took place, it would not be without precedent inside the Department of Trade and Industry for such discussions to happen where officials were present or indeed where the Department appointed its own advisers to be present so that before the discussions ended Ministers could conclude whether there was some value to be gained for shareholders which was being subject to a negative view from management because management were trying to protect themselves rather than the interests of shareholders. Can you tell the Committee that you feel confident that all the opportunities that might have been available to the Government as shareholder were fully examined, whether or not they were desirable from the point of view of Consignia management?
  144. (Mr Alexander) I will make two points. First of all, if you look at the report that was produced in terms of the acquisition of German Parcel, there was a clear direction to the DTI to make sure it had the expertise and strength to give exactly the kind of advice that you have just suggested. Secondly, prior to your arrival at the session this morning I had already accepted before the Committee that there are circumstances in which, not least in terms of the proposals to the regulator, there may be divergences in the ability of the company to articulate its own management point of view and the broader public interest articulated by the Government. Consistent with exactly that, we did appoint advisers to ensure that we were adequately briefed in terms of what would be our interests as shareholder from any potential deal that was taking place.

  145. And before discussions closed you took that advice as to whether there was scope for discussion beyond what the management was advising?

(Mr Alexander) We were receiving advice from our advisers about the discussions. The nature of these discussions are probably well-known to you. In that event the pace and speed with which decisions are reached can also be very fast. In this case it turned out that agreement could not be reached between the principal parties involved but we had the safeguard of independent advice to ensure that the interests of shareholders were protected in terms of the discussions.

Chairman: Thank you very much. We are very grateful for the time that you and your colleagues have given us this morning. We appreciate the timing of this because we realise that you want to make sure, as you said at the beginning, that you cover all the corners. I think that is important because we realise also that a number of other committees seem to have what we would consider undue interest in matters which are essentially of a departmental character and we are rather jealous of that privilege. We are also very grateful to you. You have been as frank as you can reasonably have been expected to be. That does not mean we cannot keep asking you questions to which you are not going to tell us the answers! We will labour on in the vineyard and hopefully at the end of the day we might see a better postal service because that is what we are wanting to see.